Forex - GBP/USD weekly outlook: December 31 - January 4

Investing.com - The pound edged higher against the U.S. dollar on Friday, but gains were limited as sentiment turned cautious amid ongoing uncertainty surrounding talks to avert the looming fiscal cliff in the U.S.

GBP/USD hit 1.6065 on Thursday; the pair’s lowest since December 10; the pair subsequently consolidated at 1.6157 by close of trade, 0.06% lower for the week.

Cable is likely to find support at 1.6065, Thursday’s low and resistance at 1.6201, Thursday’s high.

Trading volumes were thin as many investors already closed books to lock in profit before the end of the year, reducing liquidity in the market and increasing the volatility.

Market players remained focused on developments surrounding the fiscal cliff in the U.S., approximately USD600 billion in automatic tax hikes and spending cuts due to come into effect on January 1 unless Democrats and Republicans agree how to cut the deficit.

U.S. President Barack Obama met with congressional leaders at the White House Friday afternoon, but both sides failed to reach an agreement ahead of the looming year-end deadline.

The gathering included House Speaker John Boehner and Senate Minority Leader Mitch McConnell, both Republicans, as well as Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, both Democrats.

The House of Representatives is due to return to Washington on Sunday. The Senate will be in Sunday as well to try to reach a last-ditch agreement.

Without a deal, the U.S. could fall back into recession and drag much of the world down with it.

On the data front, the National Association of Realtors said Friday that U.S. pending home sales rose 1.7% in November, above expectations for a 1% increase.

A separate report showed that Chicago's purchasing managers' index rose to 51.6 in December, from a reading of 50.4 the previous month, beating expectations for a rise to 51.0.

Elsewhere, in the euro zone, Italy saw borrowing costs edge higher at an auction of five- and- ten-year government bonds, amid uncertainty ahead of national elections in February.

Rome sold EUR3 billion of 10-year bonds at an average yield of 4.48%, up from 4.45% last month. The country also auctioned EUR2.87 billion of five-year debt at a yield of 3.26%, compared to 3.23% a month earlier.

Meanwhile, revised data showed that France’s economy grew by a meager 0.1% in the third quarter, down from an initial estimate for growth of 0.2%. The euro zone’s second largest economy shrank 0.1% in the second quarter, unchanged from the previous estimate.

In the week ahead trading volumes are expected to remain light, with many markets closed for the New Year’s holiday.

Meanwhile, U.S. is to publish its closely-watched monthly jobs report on Friday, as investors attempt to gauge the strength of the country’s economic recovery.

Monday, December 31

The Bank of England is to produce data on housing equity withdrawals, which measures the change in the total value of new home-secured loans that are not used for home purchases or improvements.

Tuesday, January 1

Markets in the U.S. and the U.K. will remain closed in observance of New Year’s Day.

Wednesday, January 2

The U.K. is also to release data on manufacturing activity, a leading indicator of economic health.

Later in the day, the Institute of Supply Management is to produce a report on manufacturing growth in the U.S.

Thursday, January 3

The U.K. is to produce data on construction sector activity, a leading indicator of economic health. The country is also to release industry data on house prices.

Later Thursday, the U.S. is to release a report on ADP nonfarm payrolls, as well as its weekly government report on initial jobless claims. In addition, the Federal Reserve is to publish the minutes of its most recent policy-setting meeting.

Friday, January 4

The U.K. is to publish data on service sector activity, a leading indicator of economic health, as well as a report on net lending to individuals.

The U.S. is to round up the week with official data on nonfarm payrolls, the foremost gauge of job creation, as well as data on the overall unemployment rate.

The country is also to release official data on factory orders, crude oil stockpiles and natural gas inventories. In addition, the ISM is to produce a report on service sector activity.

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